This week, the National Association of Home Builders (NAHB) released the June builder confidence reading on its Well Fargo Housing Market Index (HMI). According to the index, which assesses sales conditions, sales expectations, and prospective buyer traffic, builder confidence rose to 52 this month from 44 back in May. The latest reading is the index’s highest since April 2006, which was the last time builder confidence surpassed 50. Additionally, the eight-point increase between May and June is the largest month-to-month jump since August and September of 2002.
Meanwhile, the industry also saw improvement in nationwide housing starts. Production rose 6.8% from 853,000 units in April to 914,000 in May.The National Association of Realtors reports that the number, which reflected a 28.6% gain from May 2012, fell just short of expectations. Per data from the NAHB, multi-family home production drove May’s growth with a month-to-month increase of 21.6% to 315,000 units, while single-family housing stagnated at 599,000 units. NAHB Chief Economist David Crowe attributed the stagnation in single-family production to “unusually wet weather”. Citing permits issued and permit stockpiling, Crowe expressed optimism towards increased single-family production in the future.
Since builder confidence and housing starts are on the rise, we wanted to identify the residential construction stocks that may be worthwhile value investments.
To begin, we compiled a universe of residential construction stocks. We then screened for undervaluation indicated by a low Price/Sales (P/S) ratio. When a stock has a low P/S ratio, it means that the stock’s price is cheap compared to the company’s revenues. If a stock has a P/S ratio below 1, it can be considered undervalued. However, while a P/S ratio is a helpful valuation metric, investors should note that it doesn’t take expenses or debt into consideration, and variation between industries is normal.
Next, we looked for stocks with significant increases in short covering, which means that the numbers of shares shorted have decreased month-over-month. Since short sellers benefit from declining share prices, this means that they foresee more upside in store for the stocks. For this screen, we chose those stocks with short covering comprising at least 1.5% of share float.
We were left with three stocks on our list.
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Do you agree with short sellers that these stocks have upside potential? Use this list as a starting point for your own analysis.
1. Beazer Homes USA Inc. (BZH, Earnings, Analysts, Financials): Designs, builds, and sells single-family and multi-family homes in the United States.
Market cap at $486.18M, most recent closing price at $19.72.
Price/Sales at 0.42.
Shares shorted have decreased from 8.91M to 8.44M over the last month, a decrease which represents about 2.16% of the company's float of 21.78M shares. Days to cover ratio at 5.96 days.
2. M/I Homes, Inc. (MHO, Earnings, Analysts, Financials): Engages in the construction and sale of single-family residential properties.
Market cap at $556.83M, most recent closing price at $25.0.
Price/Sales at 0.68.
Shares shorted have decreased from 2.57M to 2.23M over the last month, a decrease which represents about 1.53% of the company's float of 22.22M shares. Days to cover ratio at 5.49 days.
3. Hovnanian Enterprises Inc (HOV, Earnings, Analysts, Financials): Engages in homebuilding and financial services businesses in the United States.
Market cap at $907.8M, most recent closing price at $6.22.
Price/Sales at 0.55.
Shares shorted have decreased from 34.49M to 32.66M over the last month, a decrease which represents about 1.63% of the company's float of 112.23M shares. Days to cover ratio at 5.06 days.
(List compiled by Mary-Lynn Cesar. Short data sourced from Yahoo! Finance. All other data sourced from Finviz.)
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Analyze These Ideas: Getting StartedRead descriptions for all companies mentioned Access a performance overview for all stocks in the list Compare analyst ratings for the companies mentioned Compare analyst ratings to annual returns for stocks mentioned Real-Time Opinion: Scan the latest tweets about these companies (feed will open in a new window)
Dig Deeper: Access Company Snapshots, Charts, FilingsBeazer Homes USA Inc. (BZH, Chart, Download SEC Filings) M/I Homes, Inc. (MHO, Chart, Download SEC Filings) Hovnanian Enterprises Inc (HOV, Chart, Download SEC Filings)
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